Reducing Deforestation and Trading Emissions: Economic Implications for the Post-Kyoto Carbon Market

Last year's assessment report of the Intergovernmental Panel on Climate Change reemphasized the urgency of combating global warming. As the primary causes of climate change the report highlights fossil fuel use and land use change, the latter accounting for roughly one fifth of total anthropogenic greenhouse gas emissions. In this context, reducing emissions from tropical deforestation was recently proposed as a key element of future climate policy. Forests play a twofold role in climate change: while growing trees absorb carbon dioxide from the air and store carbon by the process of photosynthesis, forests can become a major emissions source when the stored carbon is released into the atmosphere by means of deforestation activities. This paper quantitatively assesses the economic implications of crediting carbon abatement from reduced deforestation for the emissions market in 2020. We find that integrating avoided deforestation in international emissions trading considerably decreases the costs of post-Kyoto climate policy - even when accounting for conventional abatement options of developing countries. At the same time, tropical rainforest regions receive substantial net revenues from exporting carbon-offset credits to the industrialized world. Moreover, reduced deforestation can increase environmental effectiveness by enabling industrialized countries to tighten their carbon constraints without increasing mitigation costs.

Anger, Niels and Jayant Sathaye (2008), Reducing Deforestation and Trading Emissions: Economic Implications for the Post-Kyoto Carbon Market, ZEW Discussion Paper No. 08-016, Mannheim.